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Your guide to investing for the future

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How to grow your hard-earned cash the smart way.

You work hard for your money. And investing can help your money work hard for you by generating income and growing in value.

The goal of investing is simple: build wealth so you can use it later in life or pass it on to the next generation. But while you have countless ways to invest, each comes with a degree of uncertainty.

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Key ingredients of investing

When planning where to put your money, consider the four major factors that affect investments:

  • Savings. The first step to investing is learning to live within your means to build reserves. Start by recording your assets, your debts and liabilities and everything your family spends, and adjust your budget accordingly.
  • Goals. Maybe you want to save for a home, a higher education or travel. Perhaps you’re looking to set up for a comfortable retirement or pass on a financial legacy to your kids or grandkids. Your goals will guide your investment choices.
  • Time. Most investments rely on the power of compounding interest, which is additional interest paid on your principal deposit. In other words, it’s interest paid on interest. And it helps to speed up your earnings.
  • Vehicles. You have many ways to put your money to work — CDs, stocks, annuities and more. Factor in the risks and rewards for each.

The benefits of investing

With investing, the idea is to use your money to make more money. By creating and preserving your wealth, you can reap the rewards of:

  • Return on investment. Many investments increase in value over time. Investments aren’t always guaranteed, but profit projections can help you decide what to invest in and how much to invest.
  • Dividends. If you purchase stocks, funds or cash-value life insurance, you own shares in that company and may receive a percentage of its profits — which you can either cash in or reinvest. These dividends are distributed to shareholders on a set schedule. Stocks and funds typically pay quarterly dividends, while mutually owned life insurance companies tend to pay annual dividends, sometimes called a return of excess premium.
  • Compounded interest. Many investments give you the opportunity to earn compound interest, which is essentially interest on your earnings. The longer you hold a stock, the higher its value — and the more interest you’ll earn.
  • Voice in how a company operates. When you own shares in a company or corporation, you get to vote or have a say in how it’s run.

The risks of investing

No investment is risk-free, so a big part of investing is deciding how much risk you can comfortably assume. Generally, the higher the risk, the higher the reward.

Risks investors face include:

  • Losses. The value of investments can decrease for many reasons. Companies can underperform, demand for products or services can dry up and the stock market can crash. To earn an ROI on loans, stock and annuities, the company you invest in must stay in business. If it goes bankrupt and liquidates its assets, that affects how much money you get back — if any.
  • Volatility. The value of an investment can fluctuate, sometimes wildly, due to internal factors like faulty products or external events they have no control over, like political changes.
  • Inflation. When goods and services cost more in the future than they do now, your money becomes worth a little less, and if you don’t grow your money at a rate higher than the rate of inflation, you’ll essentially be losing money on your investments.
  • Fees. Most investment categories come with a set of fees. For example, brokers charge commissions or management fees to carry out the purchase of stocks and bonds. Weigh the fees against your potential ROI.
  • Taxes. Likewise, capital gains from investing are often subject to taxes. The timing of the collection of those taxes depends on the investment. Most investments are taxed on their sale, but retirement investments can be taxed on withdrawal from the account.

Are any investments guaranteed?

No. But a few protections are in place for specific vehicles and situations:

  • The Federal Deposit Insurance Corporation insures savings accounts, money market accounts and CDs. The FDIC insures up to $250,000 of your deposits in each insured bank. The catch? FDIC-insured accounts earn a lower interest rate.
  • The National Credit Union Administration insures credit union members’ deposits. Backed by the US government, it also insures up to a maximum of $250,000 of your money.
  • The securities you own aren’t insured against a loss in value. But the Securities Investors Protection Corporation is a non-government entity that replaces missing stocks and securities in customer accounts held by a SIPC member firm if the firm fails. The limit is $500,000, including up to $250,000 in cash.

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What to invest in

You’ll find various ways to invest your money to achieve specific financial goals. Investments are grouped into categories by type — for example, bank products and bonds — each with its own features, risks and rewards.

Cash equivalents

You can stash your cash in a bank account, but other ways can make better use of your cash and earn interest or tangible assets.

Types of stocks

When you buy stocks, you’re buying a share of ownership in a company. Also called equities, stocks are based on the company type, size, potential for growth and performance in the market.
Your profits and losses depend on the success and failure of the company, as well as the influence of major trends in the stock market.

Types of funds

An investment fund collects capital from a bunch of investors to buy stocks, bonds and securities. Usually managed by professionals, they give investors access to opportunities they may not have been able to invest in on their own.

Types of options

Options are contracts that give the investor the right — but not the obligation — to buy or sell a security, such as a stock or foreign currency, at a fixed price within a specified time.
They’re derivative, which means they derive their value from their underlying assets. Options are open to both institutional and individual investors.

Types of real estate

Buying a home is among our major investments. But other investment options make up the real estate realm.

New fintech innovations that allow you to invest in real estate without the hassle of managing it include Fundrise, PeerStreet and Patch of Land.

Investment loans

Traditionally, banks granted these fixed-rate loans to help investors finance a specific project and acquire such assets as property, equipment or machinery. Today, investors will find direct lending options that include crowdfunding and peer-to-peer lending platforms.

Types of contracts

An advanced form of investing, contacts are agreements to buy or sell commodities, shares and assets.

Currencies

Also called forex or FX, foreign exchange is the largest financial market in the world. Investors trade international currencies online and over the phone.

Cryptocurrencies

Cryptocurrencies are digital assets that serve a variety of different purposes. There are over a thousand cryptocurrencies on the market, of which the best known are bitcoin and Ethereum.

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How to invest

Investing is accessible to anyone. The paths you can take to build a portfolio depend on your budget, risk tolerance and financial goals.

Investment accounts

Before signing up for an investment account, read the fine print. These accounts are typically taxable, and fees can vary.

  • Brokerage accounts. This is an arrangement between an investor and a licensed brokerage firm. As the investor, you deposit money into the brokerage account and then place orders to buy or sell such investments as stocks, bonds and mutual funds.
  • Digital apps. In recent years, fintech startups have launched apps that allow everyday earners to invest their money from their smart devices. These apps appeal to millennials and the tech-savvy, and they cut down on the fees you’d typically pay for a human to manage your money.

Retirement accounts

Look at retirement accounts as a way of investing and securing your financial future. They can help you to save for retirement and manage your income after you retire.

  • Employer-sponsored plans. With defined contribution plans like 401(k)s, 403(b)s and 457(b)s, you contribute pretax money from your paycheck to your individual account. The value of the account fluctuates over time, and on retirement, you’ll receive the balance. Many employers match your contributions, offering another incentive to save.
  • Federal government plans. Most federal employees participate in the Federal Employees’ Retirement System (FERS) or the Civil Service Retirement System (CSRS), which pays annuities monthly for the rest of your life after you retire. Employees in both systems can also opt into the Thrift Savings Plan (TSP), a defined contribution plan that operates like a 401(k).
  • Individual retirement accounts. With IRAs, you can contribute up to the limit determined by the IRS to save for retirement. IRAs include traditional, Roth IRAs and SIMPLE and SEP IRAs for the self-employed. They offer tax advantages. For example, you won’t pay taxes on your traditional IRA earnings until you retire.

Robo-advisors

Robo-advisors are exactly what they sound like: digital financial advisers. A robo-advisor relies on intricate algorithms and technology to offer financial advice, help with asset allocations and automate the management of your investments.

Financial advisers

If you prefer working with a human, you can enlist a financial planner or adviser to help you set up an investment portfolio. Most financial advisers work out of banks and require a minimum amount to invest.

Investing strategies

A good investment strategy addresses the opportunities and risks of the financial markets in a way that helps you achieve your goals. Such a strategy can change over time, but consider important components like:

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Asset allocation

Divvy up your savings sensibly. This involves determining how much money to invest into each vehicle, often based on its volatility and your risk tolerance. The classic example is for younger investors to put more money into stocks than bonds to leverage long-term growth potential, while investors closer to retirement generally keep most of their investments in less risky bonds.

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Cycles

Know what’s coming. Business cycles, economic cycles and seasons can influence the movements of investment vehicles. Restaurants must be planned, then built. Oil must be discovered, then drilled. Prescription drugs must be developed, then tested and approved.

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Diversification

Don’t put all your eggs in one basket. To manage risk and protect against market fluctuations, savvy investors diversify their portfolios across multiple vehicles and sectors.

Trends

Keep your finger on the pulse of the economy. Recognize the role that generational, technological, societal and other shifts can play in the ongoing supply and demand tug of war.

Financial markets

To get money into your desired investment, you’ll need to access a market that offers that investment, often through an investment account that participates in the various markets.

You can invest your money through national and global exchanges that include:

  • Capital markets
  • Derivatives markets
  • Forex market

Bottom line

All investments are a dance of risk and reward. The aim of investing is to build wealth and set yourself up for a comfortable financial future. But it comes with a degree of uncertainty.

What you invest your money in and how you invest it should be guided by your goals and capital.

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